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Opportunity beckons for better returns at lower cost

Sep 20 2018 09:51

Leon Kok

(iStock)

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The bottom line in any investment is how it
performs for you, the investor, and that performance includes consideration of
all fees and expenses. With a heavily loaded fund, you start your investment
with a significant loss. Avoid unnecessary charges whenever possible.

Indexing, of course, has become a major
force in financial markets since John Bogle, founder of the US-based Vanguard
Group, launched the world’s first equity index fund in 1976.

It seems barely conceivable now that it
nearly failed at birth, raising just $11m at its initial public offering
instead of its $150m target. But, since then, tracker investment strategies
based on indices have spread to every asset class amid growing recognition that
active managers too often fail to deliver on their promises to beat a
benchmark.

The shift towards indexing is a worldwide
phenomenon, says Sibiya, who is responsible for managing both local and
international tracker funds at Old Mutual Investment Group. “Tracker funds are
a sensible alternative to active investing, offering several important benefits
to investors. It’s a big misconception that, because markets are not efficient,
you need an active manager to capitalise on the opportunities presented.

“True, investor preference is generally for
active funds, but it’s been conclusively demonstrated in most capital markets
worldwide that active managers on aggregate don’t provide consistently superior
returns to the indices they aim to beat.”

Tracker funds can act as a reasonable proxy
for most conventional markets, enabling investors to extract the equity risk
premium, he says. “Balanced funds in particular provide wide diversification
throughout the market sectors. They also keep trading and other costs down,
which often erode returns generated by fund managers who transact very
actively.”

Sibiya concedes that active managers
research shares and respond to new information such as earnings announcements,
leading to share prices moving in response to them.

But equally, he points out, research
published last year by Bank of America Merrill Lynch found that US firms ranked
in the top-fifth percentile of Environment, Social and Governance Ratings (ESG)
between 2005 and 2010, experienced the lowest levels of volatility earnings per
share in that five-year period. By contrast, companies which ranked the worst
in terms of their ESG rating experienced the highest levels of volatility.

“In line with these findings, the analysis
of ESG characteristics to anticipate future volatility lends itself strongly to
index investing, particularly among investors who are mandatory holders of the
index. Indexation managers, however, need to ensure that their holdings adhere
to the principles of responsible investment, as they are unable to take an
active approach to holding certain companies.”

The Old Mutual Core Diversified Fund is a
passive fund with an underlying R240m capitalisation, exposed primarily to the
JSE Capped Shareholder Index (Capped Swix) which is a fair reflection of the
investment universe available to the South African investor. The Capped Swix
has a 52% strategic weighting in the fund.

The principal equity holdings at present
comprise Naspers* 3.3%, Growthpoint Properties 1.9%, Sasol 1.8%, Standard Bank
Group 1.6%, and Redefine Properties 1.4%. In addition to the broad local equity
market exposure, the fund has exposure to SA listed property which has a
strategic weight of 6%.

The international equity exposure is
invested in the MSCI ACWI ESG Index, with a strategic weighting of 20%. It
offers exposure to both developed and emerging markets globally.

Annualised fund performance at end-July was
5.4% over three years and 4.9% since inception. This was largely in line with
the benchmark. The fund boasts 53.7% positive months since inception and a
maximum drawdown of 5%.

*finweek is a publication of Media24, a subsidiary of Naspers.

This article originally appeared in the Fund Focus supplement in the 13 September
edition of finweek. In the print
version of this article, the Old Mutual Investment Group graph was incorrect.
We regret the error. Buy and download the magazine here or
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